Impact of Financial Crisis on Indian Banking and Strategies in dealing with the Crisis

1. Impact of Financial Crisis on Indian Banking and Strategies in dealing with the Crisis India China Financial Conference 10th November 2009 Mumbai Rajiv Kumar

2. Structure of Presentation • Global Crisis and India • India’s Policy Response • Assessment of Policy Response • Potential Measures for Reigniting Growth

3. Rapidly Changing Global Economic Outlook, IMF Growth Projections 3 Source: World Economic Outlook updates, IMF

4. Impact on India

5. Global Crisis and India • Three Principal Channels of Transmission • Financial Markets • Banking Sector • Capital Markets • Remittances • Commercial Borrowings • Exports • Exchange rate

6. Limited Impact on Indian Banks: Quarterly Performance Indicators Source: Prowess, CMIE Note: Profit Margin = PAT % to Total Income 6

7. Gross NPAs % to Gross Advances Source: Report on Trend and Progress of Banking in India, 2007-08, RBI and Prowess, CMIE

8. Month on Month Change in Outstanding Non-Food Credit ECB Frozen Credit Crunch Source: Reserve Bank of India Note: Values in Rs. Crore

9. Month wise Non Food Credit Growth, YOY Source: Reserve Bank of India Note: For the month of September the data is only available up to 25th

10. Liquidity Crisis • Inter-bank call money rate spiking to 20% in October 08 • Drying up funds from domestic and foreign capital markets leading to pressure on bank financing • Outflow through banking channels

11. Crisis and Indian Capital Market:Net FII Inflows Annual Net FII Inflows, US$ billion 2006-07: 3.2 2007-08: 20.3 2008-09: -14.1 Source: SEBI

12. Monthly FDI Inflows Annual FDI Inflows, US$ billion 2006-07: 22.8 2007-08: 34.3 2008-09: 31.6 (Apr to Jul): 7.0 / 10.0 / 5.0 Source: RBI Bulletin, June 11, 2009

13. Stock Market Collapse 19827

14. Remittances Inflow Annual Net Remittances Inflow, US$ billion 2006-07: 27.9 2007-08: 40.7 2008-09: 44.3 Source: Reserve Bank of India

15. External Commercial Borrowings Source: Reserve Bank of India

16. Imports and Exports Growth

17. Foreign Reserves & Exchange Rate • Stock of Reserves falling from $315 bn in May 08 to $271 bn in July 09 • Around 63 percent of decline in reserve can be attributed to valuation, hence actual decline in reserve is around US$ 20 billion • Rupee tumbled by 27% from end-Apr 08 to end-Mar 09 and witnessed a small gain thereafter

18. Policy Response

19. Budget Outlays on Rural India: Blessing in Disguise Values in US$ billion • MSP for Wheat increased from Rs. 630 per quintal in 2003-04 to Rs. 1080 in 2008-09 (71 % increase) • MSP for common variety of paddy increased from Rs. 550 per Quintal in 2003-04 to Rs. 900 in 2008-09 (63 % increase) Source: Union Budget

20. Fiscal Stimulus Three packages of fiscal stimulus, early Dec 08, early Jan 09, early Mar 09 Across-the-board excise duty reduction by 4 %age points Additional plan spending of US$ 4 billion State governments allowed additional market borrowing of US$ 6 billion for plan expenditure Assistance to export industries 2 percentage point reduction in central excise and service tax Current excise duty rate: 8 percent Direct fiscal burden of stimulus 1.8% of GDP Fiscal deficit (Central and States combined) rising sharply to 11% of GDP in 2008-09 (5.4% in 2007-08) and likely to be over 10% in 2009-10

21. Monetary Policy Response: RBI Policy Rate Changes • Credit tightening from Sep 2004 to Aug. 2008 and loosening thereafter • Cash reserve ratio (CRR) brought down from 9% to 5% • Statutory liquidity ratio (SLR) from 25% to 24% • Repo rate reduced from 9% to 4.75% & reverse repo rate from 6% to 3.25% • Special window for banks in their lending to mutual funds, NBFCs and housing finance companies • Refinance facility for banks from the central bank & dollar swap arrangements, etc.

22. RBI Liquidity Injection Nearly US$80 billion, over 7% of GDP of liquidity release

23. Assessment of Policy Response

24. Assessment of Fiscal Policy Response • Anticipated the Crisis! • limited fiscal headroom: High fiscal deficit: 11 % to GDP • Too late because of the state of denial that came from the theory of decoupling and strong fundamentals Looking forward • Government could monetize fiscal deficit • Increase in public debt-- 2008-09: 78 % to GDP • Credit Rating downgrading could hamper capital inflows and could raise the cost of borrowing • Modality of fiscal stimulus

25. Assessment of Monetary Policy Response • Aggressive and appropriate • But has had limited impact so far– may show effect with lag • Commercial bank’s lending rates are still high at around 10 % • Reduction in policy rates is not filtering in to the retail market, because of following reasons: • The risk averse attitude of commercial banks • Increase in Government borrowings– crowding out

26. Quarterly GDP Growth

27. Potential Measures for Reigniting Growth

28. Potential Measures for Rebalancing the Growth Fiscal options are not available Improve monetary policy traction and access to credit for the SMEs Initiate Second Generation Structural Reforms to increase the potential rate of growth. These should focus on: Infrastructure – Implementation capacity Education – liberalization and quality Business/investment environment Public health: Delivery and Quality Agriculture 28 28

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